“Novice traders make the mistake of trying to anticipate the turn. They want to ‘call the bottom’ or ‘call the top.’”
So says Alan Knuckman, the newest addition to Agora Financial’s team of analysts.
Alan got his start more than 25 years ago as a clerk on the Chicago Board of Trade. He then parlayed that opportunity into a successful career in which he’s traded everything from bonds to pork bellies.
Now he gets regular invites to appear on CNBC, Fox Business and Bloomberg TV.
During a recent interview, he shared his thoughts on why investors shouldn’t try to time when the recent bull market will end.
He also revealed…
- His No. 1 rule for trading stocks.
- Why it pays to NOT be the smartest guy in the room.
- The only signal that a market downturn has really begun.
- The best way to pick stocks in today’s market.
- His favorite breakout investment of 2017.
- How global uncertainty plays into the current bull market.
- Why you shouldn’t get distracted by politics.
- His patent-pending trading system that gives regular investors an edge.
You can read the full transcript of the interview below.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily
Q: Alan, as a former floor trader, what do you see as the biggest opportunity in the market right now?
Alan Knuckman: I’ll start with an old trading mantra that still rings true today: “The trend is your friend.”
Simply put, I still think the markets have a great opportunity to keep going higher. Just because we’ve come a long way doesn’t mean we can’t go further.
That’s rule No. 1 in trading: Markets can always go a lot higher than you think — and a lot lower than you think.
Novice traders make the mistake of trying to anticipate the turn. They want to “call the bottom” or “call the top.”
The problem is that mentality can be very expensive — not only financially but mentally as well.
Think about it — there have been people talking about the top in the market since 2009. And the market’s essentially gone straight up. Unfortunately, people factor their emotions and their own biases into their trading instead of letting the markets give them the clues to as where they’re going.
Will the market keep going straight up? No way. But as a professional trader, it’s not my job to predict when the next earthquake or shark bite is going to happen.
Right now, you cannot ignore the fact that we are in one of the greatest bull markets of all time. That’s the opportunity in front of us.
Trying to predict when that’s going to come to an end is a fool’s errand.
I like to think of it this way…
I’m not trying to be the smartest guy in the room. There will always be VERY smart people, or insiders, that “know something” before everyone else. And while I know one secret way to follow the smart money’s lead, I’ll never “guess” to try to be ahead of that crowd.
But I’m certainly not going to be the dumbest guy in the room either. That’s the person trying to pick the top.
The best traders I’ve ever worked with — and I’m talking about guys that traded millions of dollars a day — didn’t try to call the top. They made high-probability trades to cash in on big profitable trends.
Q: OK, so you said the market won’t go straight up. Do you have any tips for our readers so they’ll know when they should start playing the downside?
Alan: Aha! Now you’re starting to think the right way!
You see, when the market does turn, it won’t happen overnight. Don’t listen to anyone that says otherwise. It’s not going to be a straight-down move. In fact, it’ll happen in a very recognizable way…
The first step is we need to see sustained “sideways” action. In other words, we need to see a period of time where the market doesn’t make new all-time highs. And by the way, I don’t think we’ve gone more than a couple weeks at most before seeing new all-time highs in the major market indexes.
After we see that sideways action, from a technical standpoint what I’ll be looking for is if we close below the 200-day moving average in the S&P (and this will be a recognizable mentality shift as well). You don’t have to make this any more complicated than it is… the 200-day moving average is just a technical situation that people pay attention to.
If that happens for, say, a month, then the overall trend may be broken a bit.
So you see, a downturn won’t just sneak up on us! Professional traders don’t sit around guessing. They wait for a change in the trend and they act appropriately.
In today’s market, though, I’m still a believer in buying any dips.
The market still has inherent strength — you cannot deny that.
If you delve into the numbers, look at the dollars earned by these corporations and look at the earnings growth. The fundamentals remain solid.
And I’ll go off on a slight tangent, but it’s important…
Right now there is no other real choice for investors or traders. What are you going to do — buy Treasuries? I always look at Treasuries — I used to work in the pit. But right now we’ve got the 30-year Treasury at below 2.75%.
So are you going to tie up your money for 30 years to get 2.75%?
Are you going to tie up your money for 10 years to get 1.5%?
And if you look at the yield in the S&P 500 stocks, it’s above that of the 30-year Treasury. Until that equation changes, I’m not expecting this market to turn.
There will be pullbacks. But each and every time the market’s pulled back — and let me say that again, every time in history the market’s pulled back — it’s rallied and made new highs.
As a trader I have to respect that. That’s where the money is.
Q: OK, let’s get into the weeds here. What’s one of the specific ways you’re picking stocks in today’s market?
Alan: That’s an easy one!
Two words: bullish divergence.
Traders know that term well, but since I think it’s important for everyone to know, let me explain it right now…
So far, we’ve been talking about the overall market and that the trend is heading higher. But the overall market is full of stocks that are going up AND down.
Remember, since the overall market trend is up… for the most part, I’m going to be a buyer.
But one of the best places to find a great trade is after a stock has pulled back. Even hot stocks cool off for a little bit. Or some stocks fall out of favor from the overall trend. That’s a big opportunity if you play it right.
One of my keys is looking for bullish divergence when I’m trying to find something that’s been beaten up that I think is undervalued.
In particular, I will look for something that’s making new lows while volatility is not making new highs. That’s bullish divergence.
I know that sounds a little confusing, but hear me out….
Volatility is a simple measure. All it’s doing is measuring how fearful people are. And if volatility is not making new highs, that tells me maybe the sellers are tired out. This trade has worked many times in stocks that have fallen out of favor.
You think about stocks like Twitter that have had nice U-turns and presented some good opportunities to make money. Stocks like BP, stocks like Lumber Liquidators… a lot of these stocks that everybody had a negative sentiment on… but bullish divergence was the sign for a reversal. Those kind of trade setups have been successful for the last seven or eight years.
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Buy the dips. But better off, buy the bullish divergence.
Q: What’s your favorite “breakout” recently?
Alan: If you’ve been paying attention over the past few days, you know EXACTLY where I’m going with this…
Yep… I’m talking about GOLD.
See, a few weeks ago, I was wandering around the Agora Financial office in Baltimore and I physically took a couple of people and stuck their heads in the chart to show them what was happening in gold.
In the trading pits, everyone sees the action. In the real world, you have to really wave your arms to get folks to look. So that’s what I did.
Gold had been trading sideways — between $1,200–1,300 an ounce for all of 2017 — and it was telling us something was going to happen. Gold was really looking for a breakout.
The charts don’t lie! Finally gold broke out above $1,300 an ounce, and now we’re seeing 2017 highs. That’s a classic breakout.
And what’s great about gold is there are plenty of ways to play it! The pick I recommended to readers was with Newmont Mining, and with the special strategy we used, we ended up making over 60% in one day. That’s the power of the right trade at the right time.
But better yet, that was just one an example; there’s still more upside in gold. I’ll talk about that in a moment.
But really, that’s the biggest news of the week — the breakout and sustained follow-through on gold. Because we’d been up to this level three times unable to push through it, but that’s very significant market action.
Plus, when you look at what’s happening in the U.S. dollar, it all makes sense…
We saw the dollar make new 18-month lows.
So it’s not just gold; it’s a much larger currency play. The major headwind facing gold in recent years was a strong dollar. That’s all unwinding now. And there’s no real strength in sight for the greenback.
We’re not raising interest rates any time soon at all. And looking at the numbers, to get to a 50% or greater chance of our next rate hike we have to go all the way out to March or June of 2018. So a rate hike is not even on the radar.
Simply put, if there’s no rate hike and the dollar doesn’t go up, I think gold continues to break out to the upside. I’m looking for that to continue.
Focusing in on the gold price, if we go way back to the all-time highs in gold at $1,900 down to the recent low around $1,100, we’ve got a solid short-term price target at $1,450–1,500. That’s just getting us back to the halfway point of this recent five-year fall.
So there’s still A LOT more upside in gold.
Q: OK, we’ve talked markets, gold, the U.S. dollar… Let’s talk politics. How do politics weigh in to your trading logic — and be honest!
Alan: Ha! Sure thing, I’ll take the gloves off…
One thing I was taught when I was younger was that the markets like stability… and they hate uncertainty.
Well, this is the most uncertain time I’ve ever seen in my life, and I’ve been doing this for more than 25 years as a veteran trader.
And when I say “uncertain,” I mean it…
Congress can’t get together on anything… We’ve got a “nonpolitician” in the White House… Tensions with Russia are still bubbling up… North Korea is playing missile command almost every week… Venezuela’s economy is crumbling in front of our eyes… Cyberwarfare and hacking threaten the “internet economy”… The Middle East is still a powder keg ready to explode, with oil wars and terror camps still in full focus…
Truly these ARE uncertain times. Unlike anything I’ve seen in my life.
But… and it’s a big “but”… this all reinforces my No. 1 theory: You should focus on price — not policy, not politics.
What does the price tell us? That’s what we want to focus on. And right now the prices of the Dow and S&P tell us the markets don’t care. Donald Trump didn’t make this market. Donald Trump’s not going to break this market.
You can’t ignore the seven-year rally in the market before Trump took office. Simply put, I look at this recent action as an extension of the solid reversal/bottoming action in 2008/2009. That renewed growth and economic foundation is what put the market in this kind of position where corporations are doing what they’re doing. (And they’re doing great, by the way.)
So it has nothing to do with the policies or the politics. Instead, focus on the price.
Just like any time you see any event happen, how does the market react? That’s the question. If I told you what was going to happen tomorrow in politics or if I told you what was going to happen with earnings, you still wouldn’t know how the markets are going to react.
Take the recent Hurricane Harvey disaster unfolding in Texas. On a human level, it’s horrible to see such tragedy. Truly, I wish Godspeed to rescue efforts and I hope folks affected by the flooding recover soon.
But if you look at the nightly news or the talking heads on financial networks, one of the emotional angles they take has to do with downed refineries and rising gas prices.
However, from a market standpoint… you don’t need to get your news from those talking heads. If you want to see what’s REALLY happening to refinery row, take a look at prices.
Refined gasoline prices that trade on the NYMEX moved from $1.50 per gallon to $1.65 per gallon over the past week. So the price tells the tale.
While you may see huge headlines and talking points about “REFINERY SHUTDOWN — GAS PRICES SPIKE,” the real news is in the price. Refiner shutdowns from the hurricane goosed prices about 15 cents.
You see my point?
Focus on the price — that’s what’s important. And it’s your best tool to evaluate how the markets act after an event — and how they’ll react in the future.
Q: Alan, thanks for giving us your take. Hopefully we can catch you on the trading floor again soon!
Alan: Thanks. We’ll talk soon — the markets are always moving.
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Editor, Agora Financial